J. Howard Marshall: Scion of Bankruptcy Reform??

In 1932, J. Howard Marshall and William O. Douglas co-authored an article published in the Columbia Law Review titled “A Factual Study of Bankruptcy Administration and Some Suggestions.” Douglas (not yet 35 years old) would go on to become the longest-serving justice of the Supreme Court. But those of us at the Stern Files are not concerned with Justice Douglas (at least at present). Instead, we are concerned with a young J. Howard Marshall. Just 27 years old at the time of the article’s publication, Marshall was a recent graduate and an assistant dean at Yale Law School, teaching (among other things) classes on bankruptcy. More than 60 years before he married Anna Nicole Smith, and nearly 70 years before the Supreme Court decided Stern v. Marshall, young Mr. Marshall undertook a data-driven analysis of the then-existing bankruptcy regime so as to initiate some proposals for reform and for making the bankruptcy process more fair and efficient.

Although the lion’s share of the substance of Marshall and Douglas’s article is somewhat stale, certain observations and proposals continue to ring true today. To begin with, their data-driven analysis was well-ahead of its time, before the various bankruptcy databases, Nate Silver, and baseball sabremetrics. Importantly, portions of their analysis forecasted important developments in bankruptcy law and administration – particularly in light of Mr. Marshall’s final legacy via Stern v. Marshall and its progeny. For example, in their article, the young Messrs. Marshall and Douglas criticized the fundamental rigidity of the United States bankruptcy system, which, among other things, did not meaningfully differentiate between large and small bankruptcy cases and did not afford courts with any flexibility in developing a workout of debts owed and in granting partial or conditional discharges. In their own words:

“[I]t is felt that the [bankruptcy] system has acquired or inherited from older times a rigidity that prevents in from adequately adjusting itself to the exigencies of the life with which it deals.”

“It would be difficult and unfair to attempt a comparison of the disposition of applications for discharge in this country with that in England . . . Instead of a rather rigid procedure [i.e., in the United States], there is an extremely flexible one [in England], susceptible to greater individualized treatment of cases. It is a recognition of the folly of attempting to force all cases into one of two molds, of classifying all bankrupts in the manner of the exclusive duality of our section.”

“[Allowing bankruptcy court-sanctioned consensual workouts] would result in capitalizing on the devices successfully employed by business men to solve their difficulties . . . [and] would remove from the system its predominant insistence on treating and administering all cases alike, without consideration of their basic differences. The total result should be the evolution of a system characterized by a business technique designed in the light of the actualities of business problems.”

Marshall and Douglas recognized that bankruptcy must fundamentally include a meaningful degree of flexibility, and that rigid rules and unmoving structural concerns simply prevent a productive resolution of the debtor-creditor relationship. They proposed that the system be reworked to account for this necessary flexibility, and suggested that different rules be set in place for “large” bankruptcy cases, as compared to the smaller cases, which would not benefit from a more complex process with greater court oversight. “Too big to fail” it was not, but the article by Marshall and Douglas advocated for tailoring bankruptcy laws to accommodate the different needs of various types of debtors – indeed, many of their recommendations have come to pass, and others remain at the forefront of discussions regarding bankruptcy reform.

Notwithstanding their quibbles with the bankruptcy system, Marshall and Douglas recognized the potential for meaningful and efficient bankruptcy process, overseen by judges with wide authority to approve a restructuring of debts and to facilitate a disposition that would serve all parties’ best interests. They noted:

“We have established an institution [i.e., the bankruptcy regime] and endowed it. We have furnished it with an intricate mechanism. We have given it high legal sanction. We have thrust upon it major social and economic functions.”

In light of the recent limitation on bankruptcy courts’ authority after Stern (however it remains to be interpreted in Sharif and in the still-developing case law), Marshall and Douglas ring ever more true today. Though bankruptcy courts are not Article III courts and may lack a certain degree of constitutional authority (see, e.g., Marathon, Granfinanciera, and Stern), the system is nonetheless anticipated and empowered by the U.S. Constitution, and it has been given “high legal sanction” by Congress. To be sure, we have most definitely “thrust upon it” these “major social and economic functions.” Indeed, it is perhaps the magnitude of these social and economic functions being undertaken by the bankruptcy courts in the wake of the financial crisis that prompted the Supreme Court to decide Stern v. Marshall as it did.

Could J. Howard Marshall have known that he would indirectly precipitate what could end up being one of the most significant changes to the bankruptcy system this century? Was his life an 80-year journey into the world of bankruptcy, with a long detour into the energy sector? (Come to think of it, is it a coincidence that we also owe Marathon v. Northern Pipeline to the oil and gas industry?) Was his marriage to Anna Nicole and his last-minute amendment to his will an elaborate ploy to attempt to grant bankruptcy courts the legal sanction that they deserve? No matter what your opinion may be of this vast J. Howard Marshall bankruptcy conspiracy theory, Stern v. Marshall shows that, like LeBron, J. Howard Marshall could go home again, finally returning to the world of bankruptcy (albeit posthumously). And so we salute you, J. Howard Marshall, and induct you into the Stern Files bankruptcy hall of fame.